Business warns regulation may crimp recovery

Davos (Switzerland): Global business leaders warned Western governments on Wednesday that a populist crackdown on the financial industry could crimp a fragile recovery from the worst recession since the 1930s. The worried response to US President Barack Obama’s plans to tax and curb big banks, came on the opening day of the World Economic Forum, an annual gathering of some 2,500 business leaders and policymakers in the Swiss ski resort of Davos.

Surveys produced for the annual conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets.

But the spectre of heavy-handed regulation and government intervention in the economy was the biggest cloud on many business leaders’ horizon.

“It would be unfortunate if regulatory reforms that will be forthcoming were based on a populist message,” said Dennis Nally, global chairman of accountants PricewaterhouseCoopers (PwC).

Obama jolted markets on 21 January with proposals to force commercial banks to cut ties with hedge funds and private equity funds and stop proprietory trading, and to make the financial sector pay for a massive taxpayer bailout.

“Unfortunately, what we are seeing is a number of actions that have taken place very much on a country-specific basis,” Nally told Reuters, warning of possible “unintended consequences”.

“You’ve seen it in the US, you’ve seen it in the UK, you’ve seen it in parts of Europe. It’s not surprising because there is a lot of emotion around all of this and people want to see action taken,” he said.

Barclays president Bob Diamond challenged Obama’s effort to limit the size of big banks, telling a forum session: “I have seen no evidence ... that shrinking banks is the answer.

“If you step back and say too big is bad ... the impact of that on global trade, on the economy, could be very negative.”

Confidence Rebounds

A PwC study showed business confidence bouncing back after the sharpest drop in economic activity since World War II, prompting more industry leaders to start hiring again.

The survey of 1,200 chief executives in 52 countries found 39% of industry bosses aimed to hire extra staff in 2010, while 25% planned more job cuts, down from nearly half who slashed jobs last year.

But recruitment will be on a modest scale and mostly in booming emerging economies such as China and India, rather than in the developed world, the report showed.

Obama’s proposed curbs on Wall Street drew guarded support from European governments but officials said the European Union does not plan to follow his lead.

That could complicate efforts to build a global consensus on financial regulation in the G20 grouping of major economies.

European Central Bank president Jean-Claude Trichet played down transatlantic differences, telling the Wall Street Journal the proposed US reforms were “relevant and interesting” and shared the same aims as European measures.

“They go in the same direction of our own position, namely ensuring that the banking sector focuses on financing the real economy, which is its key role,” he said. But he called for coordination to avoid creating loopholes in the integrated international financial system.

Klaus Schwab, the German founder of the Davos forum, celebrating its 40th anniversary this year, told Reuters Insider governments had done a great job in preventing the economy falling off a cliff last year, but a hard task lay ahead.

“We have to go much more into a more stakeholder type of capitalism, we have to redesign our system and we have to rebuild our institutions and that’s what we want to do here,” he said.

French President Nicolas Sarkozy, a champion of regulation and state industrial policy who has demanded a “moralisation of capitalism”, was to give the keynote address later on Wednesday.

Against a backdrop of public outrage over bumper bonuses for bankers whose institutions were saved by taxpayer intervention, aides said Sarkozy would insist there must be no return to the excesses of financial speculation and deregulation.

Some of the most high-profile bankers, including Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase’s Jamie Dimon, have pulled out of this year’s Davos meeting.

But the CEO’s of two major bailed-out U.S. banks -- Citigroup’s Vikram Pandit and Bank of America’s Brian Moynihan -- were due to attend.

They may be in for a rough ride not only from politicians but also from some fellow business leaders.

Joergen Ole Haslestad, CEO of Norway’s Yara International ASA, one of the world’s biggest fertiliser producers, told Reuters: “I think greed took over in the last few years. At some of the financial institutions there was too much money flowing to too many young people doing to little value-added.”